Fed Transcripts Provide New Details on 2008 Fed Libor Suspicions

A top Federal Reserve official told colleagues in April 2008 that he had doubt about whether banks were being honest in how they were calculating the London interbank offered rate, or Libor, according to newly released transcripts of Fed meetings .

William Dudley, head of the Fed’s open markets group, said at the Fed’s April 29-30 policy meeting that a Wall Street Journal story earlier that month questioning Libor’s reliability had triggered “an outbreak of veracity among at least some” of the banks that contributed data to be included in Libor, a key benchmark short-term rate, the transcripts show. Mr. Dudley noted that Libor rose sharply in the days following the article and the gap between the highest and lowest submissions also jumped.

“There is considerable evidence that the official Libor fixing understates the rates paid by many banks for funding,” Mr. Dudley added. He pointed to data showing that another measure of banks’ borrowing costs had recently soared relative to Libor, which underpins interest rates on trillions of dollars of loans and other financial contracts worldwide.

Attendees at the meeting included then-ChairmanBen Bernanke and Vice Chairman Tim Geithner.

Since the 2008 hearing, Libor has become synonymous with one of the era’s marquee financial crises. Financial institutions have paid a total of more than $5 billion in penalties to settle U.S., British and European Union allegations that they tried to rig the rate, and at least a half-dozen banks and brokerages remain under investigation. A dozen individuals have been criminally charged in the U.S. or U.K. in connection with the ongoing probe.

Mr. Dudley’s comments are significant because U.S. and British officials have disagreed about who was to blame for the mess surrounding Libor, which at the time wasn’t subject to formal regulatory oversight. Mr. Dudley’s remarks are perhaps the most unequivocal to emerge showing that the Fed believed Libor was being influenced by dishonest submissions from banks.

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